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A closer study, however, revealed something else. Many Japanese firms understood that reporting
costs after the fact was of little value and dedicated few resources to these systems. Instead, welldeveloped
SCM systems were an integral part of the product development process. Early in this
process, market research established price ranges, and return on investment (ROI) criteria were
applied to the asset intensity for the planned production infrastructure to calculate necessary profits.
The difference between the expected price and the required return established a target cost for the
development process, which was then cascaded down through the various components. Project
managers at every level were expected to meet this target. All project managers were schooled in
target costing and value engineering disciplines to aid in this process, and this permeated down
through the development organization. For instance, new project managers at Toyota might start at a
minor component such as a brake caliper; if successful, they would graduate to a brake assembly, and
on up until ultimately responsible for a new car model. No product was released to production without
first meeting its target cost, and once in production these targets were monitored closely.
From a U.S. accounting perspective, the detail and rigor embedded in the system was eye-opening
but also somewhat disconcerting since the engineering function actually had responsibility for this
finely tuned SCM system. When asked where they found the insight for such a finely tuned system,
Toyota management provided references to systems developed in Detroit in the early 1950s.
Summary
Activity-based costing is a powerful management tool when used properly. It is not a narrow product
costing methodology but, rather, a key element of any process management analysis. By making the
economics of a business model transparent, it is the necessary first step of any planning initiative
whether it be the reengineering of a flawed process or the creation of a new strategic plan. The design
of ABC systems is based on a simple paradigm: Costs are a function of activities that consume
resources that have been acquired to execute a strategy. Only when this is understood at the value
system level can one effectively lead an organization.
Notes
1 “Accounting Bores You? Wake Up,” Fortune, October 12, 1987, 44.
2 This will be discussed further in the final section of this chapter.
3 If there is a mix of units, then equivalent units are often used, such as the semiconductor industry
using the number of layers to define an equivalent unit (e.g., an equivalent unit might be a chip with
five layers, so a more complex chip with, say, 10 layers would be the equivalent of two chips).
4 This will be discussed in more detail later in the chapter.